ECONOMICS Year 10

Costs, Revenues & Profits

Making a Profit

DO EXERCISE 1 pp 222 The Bear Necessities

Per week ($) 100 45.00 5.00 Variable Costs Materials Foam Wages Per bear ($) 6.00 1.00 1.00

Fixed Costs Rent for factory Hire Machines Heating & Lighting

Repayment of bank loan 50.00

TOTAL

200.00

8.00

1.

Fixed cost that remains (more or less) unchanged irrespective of the output level or sales revenue of a firm, such as depreciation, insurance, interest, rent, salaries, and wages. If Sue produced 100 bears in a week, FC is still $200.00 as remains unchanged If Sue produced 1000 bears in a week, FC is still $200.00 as remains unchanged

2.

3.

4.

Variable Cost is A cost of labor, material or overhead that changes according to the change in the volume of production units. Combined with fixed costs, variable costs make up the total cost of production. (TC=TFC + TVC) While the total variable cost changes with increased production, the total fixed costs stays the same. 100 bears x 8 = $800 1000 bears x $8 = $8000 If 100 bears TC = 200 + 800 = $1000 If 1000 bears, the Total Cost = 200 + 8000 = $8200

5. 6. 7.

8.
Bears produced in a week 0 50 100 200 300 400 500 600 700 800 900 1000 Fixed Cost Variable Cost Total cost Avg Cost

200 200 200 200 200 200 200 200 200 200 200 200

0 400 800 1600 2400 3200 4000 4800 5600 6400 7200 8000

200 600 1000 1800 2600 3400 4200 5000 5800 6600 7400 8200 12 10 9 8.67 8.5 8.4 8.33 8.29 8.25 8.22 8.2

8
12000

10000

Costs/ Revenues

8000 Total cost Total Revenue

6000

4000

2000

0 50 0 100 500 600 700 900 1000 200 300 400 800

Number of bears

9
9000 8000 7000 6000 Costs 5000 4000 3000 2000 1000 0 0 50 100 200 300 400 500 600 700 800 900 1000 Fixed Cost Variable Cost Total cost

No of Bears

10. $10 per bear 11. $10 TOTAL REVENUE = Price per bear X No of bears sold Average Revenue (AR) = Total revenue/ No of bears sold 12. 100 bears x $10 = Total revenues= $1000 13. 1000 bears = TR = 1000 x $10 = $10000

14
Total Revenue 500 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 Total cost 200 600 1000 1800 2600 3400 4200 5000 5800 6600 7400 8200 Profit/ Loss -200 -100 0 200 400 600 800 1000 1200 1400 1600 1800 0 50 100 200 300 400 500 600 700 800 900 1000

Bears produced in a week

16. Break even point is TR = TC

What is Cost?

All payments made by a firm in the production of a good or service are called the cost of production. These costs can be classified in different ways.

Types of costs
Fixed Cost and Variable cost Fixed costs are expenses that do not change in proportion to the activity of a business, within the relevant period or scale of production. For example, a retailer must pay rent and utility bills irrespective of sales.

Variable costs by contrast change in relation to the activity of a business such as sales or production volume.

In the example of the retailer, variable costs may primarily be composed of inventory (goods purchased for sale), and the cost of goods is therefore almost entirely variable. In manufacturing, direct material costs are an example of a variable cost. An example of variable costs is the prices of the supplies needed to produce a product. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed.

But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable. Along with variable costs, fixed costs make up one of the two components of total cost. In the most simple production function, TC = FC + VC It is important to understand that fixed costs are "fixed" only within a certain range of activity or over a certain period of time. If enough time passes, all costs become variable. Variable costs are expenses that change in proportion to the activity of a business. For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw materials is used and spending therefore rises.